China is Friday Sellers’ Biggest Fear

By Brendan Conway

Sure, the market is reacting Friday to an improving jobs outlook, which might force a stingier policy at the Federal Reserve.

But the weakest areas point in a different direction: China and emerging markets.

Judging by the trading in emerging markets, Chinese stock ETFs and especially the price of copper — which is keenly sensitive to Chinese demand — there’s something of a hidden selloff on Friday, one that’s more about overseas worries than anything at home.

But there were country-specific developments this week, too. First came word Monday from HSBC that China’s manufacturing activity fell to a seven-month low.

Then, overnight, the first-ever domestic corporate-bond default in China emerged. The worry, clearly, is less about solar-equipment maker Shanghai Chaori Solar Energy Science & Technology Co. than whether a wave of similar defaults is on the way.

The interesting part is that Chinese markets didn’t sell off much overnight: The Hang Seng finished down 0.2%.

So how do we know this is about China? The 4% decline in copper prices was the biggest single-day drop in more than two years. As Ira Iosebashvili of the Wall Street Journal points out, 40% of global demand is found there.

Each new round of disappointing Chinese data raise doubts about whether the country’s manufacturers can use all of the copper that will be produced this year, traders and analysts say.

“Until the Chinese economy picks up and starts using up the supply that is out there, I can’t see copper trading much higher,” said James Cordier, a principal at Liberty Trading Group. “Unfortunately, there are no signs of that happening right now.”

Not that it’s some giant honking massacre, but it is different from the overnight session. iShares China Large-Cap ETF (FXI) is down 1.4%. iShares MSCI Emerging Markets ETF (EEM) and Vanguard FTSE Emerging Markets ETF (VWO) are down about 1.4% apiece.

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